Hot Topics:

Beyond BRIC

As the world’s biggest emerging markets slow down, others are picking up the slack. Should Alberta companies try to get a piece of that action?

Apr 15, 2014

by Tim Querengesser

As growth cools in formerly emerging markets, should your next targets be Asia and Africa?Illustration Graham Roumieu

Remember BRIC, that oh-so versatile acronym for the once red hot emerging markets of Brazil, Russia, India and China?

While the BRIC was once used to build many a financial success story, lately it’s become about as exciting as a plain old brick. Growth of Russia’s gross domestic product has tapered to 3.4 per cent in 2012, India’s to 3.2 per cent and oil-rich Brazil’s growth has all but evaporated, to 0.9 per cent (GDP growth in China still exceeds five per cent per year).

“You go to the underdeveloped countries that are starved of investment, that welcome you in through the front door and offer very attractive fiscal terms.” – David Mitchell, president and CEO, Madison Petrogas

As the BRIC cools down, then, the search for the next emerging market heats up. While many see looking farther afield than the BRIC as a recipe for potential riches – and note that such markets often hunger for Alberta’s expertise and drilling technology – some say investing capital more conservatively within BRIC, or even in Alberta, is the smarter approach. Welcome to the brave new international trade world made out of more than just BRICs.

For Calgary’s Madison Petrogas, looking beyond BRIC was a given. Its president and CEO, David Mitchell, has more than 35 years of experience finding and producing oil in the Middle East and Africa for companies such as British Petroleum and Nexen. Little surprise, then, that the company he now heads has invested heavily in a near-shore oil exploration project in Cameroon. “You go [beyond the BRIC] because the size of the prize gets bigger,” Mitchell says. “North America is pretty played out, the U.K. and Australia are pretty played out. And of course, the value for shareholders attached to the size of the discovery is relatively small. It starts getting bigger as you go to the BRIC countries. And then you go to the underdeveloped countries that are starved of investment, that welcome you in through the front door and offer very attractive fiscal terms, where the size of the prize can be orders of magnitude larger than the OECD countries.”

Mitchell says Madison’s business plan is to avoid the countries where the big fish already lurk and instead go to places they have forgotten. He says his contacts and in-country experience are essential for working in Africa, and credits some 30-year-old seismic data for his company’s decision to explore a field in Cameroon where none of the big players are. Yet.

Like Madison has discovered, Africa – east, west and north – is hot for oil and gas exploration. If there was any doubt, the recent attendance at Africa Oil Week, in Cape Town, likely smashed it. “The event started [20 years ago] at about 20 to 30 people,” says Shane Jaffer, director of Africa region for Alberta’s International Development Office. Jaffer attended the most recent conference with about 50 Albertan companies in January. “At the last conference, they had 1,600 people. That shows worldwide interest in Africa,” he says.

Jaffer says Alberta is well placed to succeed in Africa, echoing sentiments raised by Mitchell. For one, he says, Albertan technology, developed to harvest oil but past its useful lifespan at home, is in demand in African markets with conventional oil fields. But for another, with Africa especially, countries and companies that are willing to offer social benefits and regulatory expertise to host countries can shape the regimes they will ultimately be working in. “What we bring is a social dimension, which some countries don’t necessarily have,” Jaffer says of Albertan corp­orate involvement in Africa. “That gives us a better face in those countries or helps us open the doors.” Further, it helps make the rules to live by more familiar. “They want an understanding of how we manage our resources, how we manage gas firing issues, the revenue management associated with extractive sectors,” Jaffer says. “We’re trying to share some of that experience to those countries. If we’re able to create an environment and a level playing field, it creates an opportunity for our companies to go into those marketplaces.” Jaffer adds that he often fields requests from African countries for potential technical partners.

The downside of both the BRIC countries and those beyond it is often an extended time frame for realizing a return on investment. “Everything will take longer than it does in North America,” says Neil Taylor, vice-president of finance with Madison. “The time frame from beginning of project to first oil or beginning of contact to signing a contract will take longer, and you just have to recognize that,” he says. But, Mitchell says, that’s all part of the package: “It’s all a risk-reward equation … for investors, if it works, the return on investment – of course they could lose it all – is 10 to 20 times what they potentially could make in North America.”

And there are emerging markets beyond Africa that now make BRIC look dull. Think Indonesia, Bangladesh, Turkey and others. A 2012 report by Boston Consulting Group asserts that the annual growth rate in emerging markets like these will sit at about six per cent, right where the BRIC lived three years ago. The countries beyond BRIC are more easily clustered by region than individual nation. There are ASEAN countries (Thailand, Malaysia, Indonesia), the Andeans (Chile, Argentina, Colombia), the “North African belt” (Algeria, Egypt, Morocco) and the “Emerging Mideast” (Iran, Saudi Arabia, Turkey).

Fittingly, those with a more conservative outlook are playing many different fields rather than concentrating only within the hot emerging markets. Brent Anderson, manager of external communications with Talisman Energy, notes that the company is scaling back its international projects, closing shop completely in Sierra Leone and Peru, and throttling back in Kurdistan. “It’s an interesting time to be having this conversation with Talisman, because Talisman historically has had a much larger international footprint,” Anderson says. “Looking ahead, Talisman intends to reduce its footprint internationally as we direct capital to more core areas.”

The decision, Anderson says, is driven by opportunities and capital limitations. “We have more opportunities within our portfolio than capital to deploy to them,” he says. “So we look for the shorter time to production and quicker time to cash flow. For us, we look for nearer-term opportunities to see a return on capital.” Those opportunities, he says, are within Alberta and North America.

Time is also a driving factor. While Talisman has drilled successful holes in Kurdistan, where it has worked since 2008, and produced oil there, the company is still years away from earning a return on its investment. “Kurdistan’s a good example of an under-explored part of the world that we think has some pretty big potential. But the reality is from the time a license is secured to the time that those wells are tied-in and prod­ucing, and you’re getting paid for them, that could be five plus years,” he says.

Still, Talisman maintains a stronghold in Indonesia – the fourth largest country on earth and one that’s growing faster than China – as well as Vietnam and Malaysia. It hasn’t abandoned the BRIC either, with assets in Brazil. “Historically, Talisman has been one of the leaders in looking abroad for investment,” Anderson says. “At some point, when we are in a position where our cash flow and our capital spending are more in line, Talisman may look to international locations again. But for now, we have more than enough opportunities in our backyard.”

Alberta Venture welcomes your comments. Please stay on topic and be respectful of other readers. Review our comments policy. If you see a typo or error on our site, report it to us. Please include a link to the story where you spotted the error.